How does one convert a $1.2 billion project into a $5.0 billion project? Its easy. Just build

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How does one convert a $1.2 billion project into a $5.0 billion project? It’s easy. Just build a new airport in Denver. The decision to replace Denver’s Stapleton Airport with Denver International Airport (DIA) was made by well-intentioned city officials. The city of Denver would need a new airport eventually, and it seemed like the right time to build an airport that would satisfy Denver’s needs for at least 50 to 60 years. DIA could become the benchmark for other airports to follow.

A summary of the critical events is listed next:

1985: Denver Mayor Federico Pena and Adams County officials agree to build a replacement for Stapleton International Airport.
Project estimate: $1.2 billion
1986: Peat Marwick, a consulting firm, is hired to perform a feasibility study including projected traffic. Results indicate that, depending on the season, as many as 50 percent of the passengers would change planes. The new airport would have to handle this smoothly. United and Continental object to the idea of building a new airport, fearing the added cost burden.
May 1989: Denver voters pass an airport referendum.
Project estimate: $1.7 billion
March 1993: Denver Mayor Wellington Webb announces the first delay. Opening day would be postponed from October 1993 to December 1993. (Federico Pena becomes Secretary of Transportation under Clinton.)
Project estimate: $2.7 billion
October 1993: Opening day is to be delayed to March 1994. There are problems with the fire and security systems in addition to the inoperable baggage handling system.
Project estimate: $3.1 billion
December 1993: The airport is ready to open but without an operational baggage handling system. Another delay is announced.
February 1994: Opening day is to be delayed to May 15, 1994, because of the baggage handling system.
May 1994: Airport misses the fourth deadline.
August 1994: DIA finances a backup baggage handling system. Opening day is delayed indefinitely.
Project estimate: $4 billion-plus
December 1994: Denver announces that DIA may have been built over an old  Native American burial ground. An agreement is reached to bless the site.
AIRPORTS AND AIRLINE DEREGULATION

Prior to the Airline Deregulation Act of 1978, airline routes and airfare were established by the Civil Aeronautics Board (CAB). Airlines were allowed to charge whatever they wanted for airfare if approved by CAB. The cost of additional aircraft was eventually passed on to the consumer. Prior to the Act, the high cost of airfare restricted travel to business people and wealthy individuals who could afford it.

Before deregulation, increases in passenger travel were moderate. Most airports were already underutilized, and growth was achieved by adding terminals or runways on existing airport sites. The need for new airports was not deemed critical for the near term.

Following deregulation, the airline industry had to prepare for open market competition. This meant that airfares were expected to decrease dramatically. Airlines began purchasing large numbers of planes, and most routes were fair game. Airlines had to purchase more planes and fly more routes in order to remain profitable. The increase in passenger traffic was expected to come from the average person who could finally afford air travel.

Deregulation made it clear that airport expansion would be necessary. While airport management conducted feasibility studies, the recession of 1979 to 1983 occurred. Several airlines, such as Braniff, filed for bankruptcy protection under Chapter 11, and the airline industry headed for consolidation through mergers and leveraged buyouts.

Cities took a wait-and-see attitude rather than risk billions in new airport development. Noise abatement policies, environmental protection acts, and land acquisition were viewed as headaches. The only major airport that had been built in the previous twenty years was Dallas–Ft. Worth, which was completed in 1974.

DOES DENVER NEED A NEW AIRPORT?

In 1974, even prior to deregulation, Denver’s Stapleton Airport was experiencing such rapid growth that Denver’s Regional Council of Governments concluded that Stapleton would not be able to handle the traffic expected by the year 2000. Modernization of Stapleton could have extended the inevitable problem to 2005. But were the headaches with Stapleton better cured through modernization or by building a new airport? There was no question that insufficient airport capacity would cause Denver to lose valuable business. Because Denver is 500 miles from any other major city, air travel was very important to it.

In 1988, Denver’s Stapleton International Airport ranked as the fifth busiest in the country, with 30 million passengers. The busiest airports were Chicago, Atlanta, Los Angeles, and Dallas–Ft. Worth. By the year 2000, Denver anticipated 66 million passengers, just below Dallas–Ft. Worth’s 70 million and Chicago’s 83 million estimates.

Delays at Denver’s Stapleton Airport caused major delays at all other airports. By one estimate, bad weather in Denver caused up to $100 million in lost income to the airlines each year because of delays, rerouting, canceled flights, putting travelers into hotels overnight, employee overtime pay, and passengers switching to other airlines.

United Airlines and Continental comprised 80 percent of all flights in and out of Denver. Table I shows the service characteristics of United and Continental between December 1993 and April 1994. Table II shows all of the airlines serving Denver as of June 1994. Exhibit III shows the cities serviced by Denver. It should be obvious that delays in Denver could cause delays in each of these cities.

questions

1. Is the decision to build a new airport in Denver strategically a sound decision?
2. Perform analysis for strengths, weaknesses, opportunities, and threats (SWOT) on the decision to build DIA.
3. Who are the stakeholders and what are their interests or objectives?
4. Did the airlines support the decision to build DIA?
5. Why was United opposed to expansion at Front Range Airport?
6. Why was the new baggage handling system so important to United?
7. Is DIA a good strategic fit for Continental?
8. United is a corporation in business to make money. How can United issue tax-free municipal bonds?
10. What impact do the rating agencies (i.e., Moody’s and Standard & Poor’s) have in the financing of the airport?
11. According to the prospectus, the DIA bonds were rated as BBB by Standard & Poor’s (2.5%) Corporation. Yet, at the same time, the city of Denver was given a rating of AA. How can this be?
12. What is the function of the project management team (PMT) and why were two companies involved?
13. When did the effectiveness of the project management team begin to be questioned?
14. Did it sound as though the statement of work/specifications provided by the city to the PMT was “vague” for the design phase?
15. During the design phase, contractors were submitting reestimates for work, 30 days after their original estimates, and the new estimates were up to $50 million larger than the prior estimate. Does this reflect on the capabilities of the PMT?
16. Should the PMT be qualified to perform risk analyses?
17. Why were the architects coordinating the changes at the construction site?
18. Should the PMT have been replaced?
19. Do scope changes reflect the ineffectiveness of a PMT?
20. Why did United Airlines decide to act as the project manager for the baggage handling system on Concourse B.